Econometric Advisors APARTMENT OVERVIEW AND OUTLOOK Q4 2017
THE U.S. ECONOMY WILL REMAIN ON FIRM FOOTING IN 2018 JOB GROWTH WILL MODERATE AS LABOR MARKET TIGHTENS FURTHER STRONG CONSUMPTION, HIGHER PRIVATE INVESTMENT AND THE NEW TAX PLAN ARE EXPECTED TO DRIVE GROWTH, BUT EMPLOYMENT GROWTH IS SLOWING In January, monthly job growth s trailing 12-month average was down to 176,000 jobs from January 2017 s 208,000. Hurricane impacts affected certain service sectors, but the broader slowdown has been driven by a tight labor market. With firms competing to hire workers from a shrinking talent pool, January registered the strongest wage growth in nine years. Wage growth may continue to quicken if the unemployment rate continues to decline. THE OUTLOOK FOR 2018 IS STRONGER THANKS TO PASSAGE OF TAX BILL Federal tax reform will stimulate the economy in the medium term, while also straining the government s already weak fiscal position. With the U.S. economy s negative output gap having closed, the new tax cuts are likely to raise inflation. Along with an increasingly tight labor market, this may make the Fed more hawkish, prompting further rate increases that could tighten financial conditions later in the year and lead to lower growth in 2019. We ve revised our baseline forecast for 2018 GDP growth upward 20 bps to 2.6%. Our upside and downside forecast scenarios, while reflecting a wider range of outcomes and policy uncertainty, remain unchanged from last quarter. 2 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
LABOR MARKET TIGHTENS, WAGE GROWTH STILL STRONG EMPLOYMENT GROWTH, YOY (%) 4 2 0 (2) (4) (6) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Total Nonfarm Source: CBRE Econometric Advisors, Q4 2017. WAGE GROWTH, YOY (%) 3 2.5 2 1.5 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 All Private The unemployment rate fell from 4.2% to 4.1% QOQ; the labor force participation rate remained stable, MOM, at 62.7%. Low unemployment is making it difficult to find qualified workers, however, which is slowing the trend in employment growth. Wage growth is healthy; January s YOY rate of 2.9% is the highest of the current cycle. Further wage growth will benefit renters and landlords alike by improving affordability. Rent growth has slowed more in markets with low affordability especially in Class A. Expect both slowly rising wage growth and slowing employment growth to continue. 3 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
HOMEOWNERSHIP RATE MOVES UP SLIGHTLY IN Q4 2017 The homeownership rate has steadily declined since its Q4 2004 peak of 69.2%; in Q4 2017 it was 64.2%. The Q2 2016 rate (62.9%) was a 20-year low; it has since risen 130 bps and looks to have stabilized. The Q4 2017 rate (64.2%) was up 50 bps YOY; its movement over the past two years has been mostly sideways. With the rate so far below its 20-year average (66.7%), some continued mean reversion is 65 very likely. 64 Even if homeownership preferences by age cohort don t change, the aging population will 63 slowly push the ownership rate modestly higher. 62 U.S. HOMEOWNERSHIP RATE (Q1 1997-Q4 2017) 70 69 68 67 66 (%) Homeownership Rate 20 Yr. Avg. Q1 1997 Q4 1997 Q3 1998 Q2 1999 Q1 2000 Q4 2000 Q3 2001 Q2 2002 Q1 2003 Q4 2003 Q3 2004 Q2 2005 Q1 2006 Q4 2006 Q3 2007 Q2 2008 Q1 2009 Q4 2009 Q3 2010 Q2 2011 Q1 2012 Q4 2012 Q3 2013 Q2 2014 Q1 2015 Q4 2015 Q3 2016 Q2 2017 Source: U.S. Bureau of the Census, CBRE Econometric Advisors, Q4 2017. 4 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
LONG-TERM RATES HAVE FOLLOWED INFLATION EXPECTATIONS LOWER 10-YEAR TREASURY RATE (%) 3.5 3.0 From October 2016 to March 2017, the 10-year rose 125 bps from 1.37% to 2.62%. The increase was comparable to the 135-bps run-up during the taper tantrum of 2013 (1.66% to 3.01%). The 10-year Treasury has since remained between 2.0% and 2.7%. 2.5 The 10-year yield recently moved to a multiyear high due to the passing of a tax bill that will likely boost growth and inflation. 2.0 1.5 Still, that movement was fairly minimal, bringing the yield in line with postelection levels implying that growth and inflation expectations haven t changed much. 1.0 The unwinding of the Fed balance sheet will likely put some upward pressure on longer-term rates. 2018 2017 2016 2015 2014 2013 Source: Board of Governors of the Federal Reserve System, CBRE Econometric Advisors, Q4 2017. 5 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
U.S. apartment absorption remained robust through Q4 2017; supply still outstripped demand slightly, despite weather and labor shortagerelated delays.
PEAK COMPLETIONS IN 2018 STATE OF THE APARTMENT MARKET The Sum of Markets vacancy rate rose 10 bps, YOY, to 4.9%. For the past five years, fourth-quarter vacancy rates have trended between 4.6% and 5.1%. Strong completions (4-qtr sum: 265,865) led to the marginal increase in vacancy. Robust absorption (4-qtr sum: 241,233) was at its highest since 2010. Absorption is expected to hit a new high in 2018. Strong demand will help to moderate vacancy through 2018; our models predict a modest 20- bps rise in vacancy during that time. 500,000 400,000 300,000 200,000 100,000 0 (100,000) NET ABSORPTION, COMPLETIONS (UNITS) VACANCY RATE (%) Forecast 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Completions Net Absorption Vacancy Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017. 7 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
SUPPLY TRENDS: SOME MARKETS SHOWING MORE RISK ANNUAL STOCK GROWTH (%) For the Sum of Markets, the past year s supply growth (1.8%) exceeds the long-run 6.0 Last 12 Months Long-Run Average average (1.1%). 5.0 4.0 3.0 2.0 1.0 0.0 4.7 4.5 4.2 4.1 San Antonio Greenville Austin Nashville 3.6 3.5 3.4 3.3 3.3 3.0 2.9 2.9 2.8 2.7 2.7 2.6 2.5 Charlotte Salt Lake City Denver West Palm Beach Orlando Seattle Kansas City Raleigh Columbus Memphis Portland Dallas Lexington 2.3 2.2 2.2 Fort Lauderdale Minneapolis Tulsa 1.8 Sum of Markets Although the same holds for many individual markets, supply growth has trended down in those with the largest supply pipelines. The growth of supply is weighing on rent growth and will likely continue through H1 2018. Even with new deliveries, continued strong employment growth and subsequent net absorption will help many of these markets outperform the Sum of Markets. Rent growth will continue to hold up well in large, non-gateway markets. Source: CBRE Econometric Advisors, Q4 2017. 8 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
DEMAND IS STRONG IN SECONDARY MARKETS 4-QTR NET ABSORPTION AS A PERCENT OF CURRENT INVENTORY TOP 20 MARKETS (%) 4.0 3.6 3.5 3.4 3.5 3.4 3.3 3.1 3.1 3.0 3.0 3.0 2.9 Sum of Markets: 1.6 % 2.7 2.5 2.5 2.4 2.3 2.3 2.3 2.3 2.3 2.2 2.2 2.0 1.5 Markets that have posted strong absorption figures over the past year are scattered across the U.S. and include Austin, Nashville, Orlando, Denver and Pittsburgh. The common thread: most of these markets are smaller secondary markets where renting is generally more affordable. Of the past year s top 20 absorption markets, only Houston is in the top 10 by inventory size. In just one gateway market has demand outpaced the Sum of Markets: Washington, D.C. Expect secondary markets to outpace gateway markets in demand growth over the near term. 1.0 Greenville Orlando Austin Denver Houston San Antonio Nashville Salt Lake City El Paso Charlotte Columbus Kansas City Portland Memphis West Palm Beach Norfolk Las Vegas Pittsburgh Tampa Raleigh Source: CBRE Econometric Advisors, Q4 2017. 9 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
FEWER MARKET POSTED VACANCY DECLINES IN Q4 2017 CHANGES IN VACANCY, TOP & BOTTOM TEN (PAST 4 QUARTERS, BPS) San Antonio Louisville St. Louis Cleveland West Palm Beach Nashville Fort Worth Chicago Tulsa Seattle Hartford Tucson Riverside Providence Orlando Jacksonville Richmond Pittsburgh El Paso Houston -170-180 -110-90 -30-40 -40-40 -40-50 100 90 90 80 80 80 80 70 70 Sum of Markets: +10 bps (200) (150) (100) (50) 0 50 100 150 120 Sum of Markets YOY vacancy rate: 4.9% (up 10 bps from 4.8%). Vacancy rates declined in 21 markets, YOY. It increased in 36 and for the Sum of Markets. Six markets registered no change. The greatest vacancy rate increases are occurring in markets where supply growth is strong (Nashville, San Antonio, Seattle) and/or markets where economic factors have slowed demand growth (St. Louis, Cleveland). In the markets where vacancy rates continue to decline, most of the tightening is due to a lack of completions and not necessarily to spikes in net absorption although there are a few exceptions. Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017. 10 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
STRONG NUMBERS FROM MANY OF THE 20 LARGEST MARKETS Sum of Markets (SoM) YOY rent growth: -0.3%. NOMINAL RENT GROWTH (YOY, %) 14 of the 20 largest markets nevertheless recorded positive nominal rent growth, YOY. Phoenix topped the list with 3.6%. New York was the laggard among the large markets, with a YOY change of -4.7%. 4 3 2 1 If we remove New York, which accounts for 13.1% of our SoM inventory, from the SoM calculation, rent growth was 1.1% a figure more in line with most markets results over the past year. For most major markets, rent growth will remain above the SoM average over the next four quarters. The number of markets posting positive YOY rent growth went unchanged from Q3 2017. 0 (1) (2) (3) (4) (5) (6) Phoenix Denver Atlanta Baltimore Houston Tampa San Diego San Francisco Dallas Seattle Washington, DC Detroit Sum of Markets: -0.3 Los Angeles Minneapolis Miami Sum Of Markets Boston Philadelphia Orange County Chicago New York Source: CBRE Econometric Advisors, Q4 2017. 11 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
RENT GROWTH TO OUTPERFORM IN SMALL & COASTAL MARKETS Sum of Markets annual rent growth of -0.5% is forecast for the next two years. This is due in part to our call for a mild recession in late 2019 and early 2020. Secondary and tertiary markets dominate the rent growth forecast; just three of the 20 largest markets are among the top 20 for two-year forecast rent growth. Tampa leads the major markets, with annual growth of 2.0% forecast. Ten of the top 20 markets for forecast rent growth are in California (5) or Florida (5). Our baseline outlook favors markets with weaker supply growth and stronger growth in professional services employment. TWO-YEAR BASELINE FORECAST: ANNUAL NOMINAL RENT GROWTH (%) 5 3.6 3.5 4 3.2 2.7 2.6 3 2.2 2.2 2.0 2.0 1.9 1.9 1.8 1.8 1.8 1.8 1.6 1.6 1.5 2 1.3 1.3 1 (1) -0.5 (2) Newark Long Island Orlando Jacksonville Oakland Richmond Sacramento Tampa Columbus Houston Ventura West Palm Beach Honolulu Norfolk Fort Lauderdale Indianapolis San Diego Tucson Riverside Cleveland Sum Of Markets 12 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
RENT GROWTH CONTINUES TO LAG IN TIER 1 MARKETS CHANGES IN RENT GROWTH BY MARKET TIER* 8 6 4 2 0-2 -4-6 -8 Tier I Tier II Tier III YOY rent growth: Tier I markets: -1.2% Tier II markets: 2.0% Tier III markets: 1.2% Tier II and III rent growth tends to outperform during the later stages of the business cycle. CBRE EA forecasts slowing rent growth across Tier I markets as a whole over the next eight quarters. Investment volumes by metro somewhat reflect rent growth trends by market tier. The largest markets where rent growth is often weakest have recorded YOY declines in investment volume, while volume has held up or accelerated in smaller markets. -10 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 2009.4 2010.2 2010.4 2011.2 2011.4 2012.2 2012.4 2013.2 2013.4 2014.2 2014.4 2015.2 2015.4 2016.2 2016.4 2017.2 2017.4 Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017. *Market tiers based on market classifications from the CBRE Cap Rate Survey 13 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
NO Q4 SPIKE BUT VOLUME REMAINS STRONG TO END THE YEAR Q3 VOLUME FLAT, YEAR OVER YEAR TRANSACTION VOLUME ($, BILLIONS) CAP RATE (%) 60 Transaction Volume Average Cap Rate 50 40 30 20 10 0 Q1 2003 Q4 2003 Q3 2004 Q2 2005 Q1 2006 Q4 2006 Q3 2007 Q2 2008 Q1 2009 Q4 2009 Q3 2010 Q2 2011 Q1 2012 Q4 2012 Q3 2013 Q2 2014 Q1 2015 Q4 2015 Q3 2016 Q2 2017 Source: Real Capital Analytics, CBRE Econometric Advisors, Q4 2017. 9 8 7 6 5 4 Cap rates were flat in Q4 2017, QOQ, and down 10 bps, YOY. Cap rates are now 60 bps below their prerecession lows. 2017 investment volume was down 6.9%, YOY to $147.0 billion from $157.8 billion. Q4 2017 volume was down 8.3%, YOY. Increases in short- and long-term interest rates during Q4 2016 and Q1 2017 contributed to the lower Q1 volume, impacting the 2017 total. The recent growth in investment volumes can be partially attributed to the surprisingly robust net absorption that is keeping vacancy rates fairly stable as completions continue to rise across markets. Global growth and tax cuts should act as tailwinds for volume in 2018. 14 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
CAP RATES U.S. MULTIFAMILY RATE COMPRESSION CONTINUED IN TIER II AND TIER III MARKETS DURING H2 2017 Class A Class B Class C Class A Class B Class C Average Rate (%) Change vs H1 2017 (BPS) INFILL METRO TIER All I II III 4.67 4.40 4.70 5.42 5.15 4.80 5.24 6.03 5.91 5.45 5.87 7.25 INFILL METRO TIER All I II III -1 4-6 -10 0 8-15 0-9 -6-17 -8 SUBURBAN METRO TIER All I II III 4.96 4.67 5.00 5.52 5.49 5.15 5.58 6.05 6.32 5.95 6.25 7.17 SUBURBAN METRO TIER All I II III -7-1 -15-7 -6 2-16 -6-9 -2-15 -13 Source: CBRE Research, CBRE Capital Markets, H2 2017. 15 Q4 2017 APARTMENT OVERVIEW AND OUTLOOK
Matt Vance Economist Director, Research and Analysis +1 303 628 7450 matthew.vance@cbre.com Maximilan Saia Economist +1 213 613 3539 maximilian.saia@cbre.com Copyright (C) 2018, CBRE Econometric Advisors (CBRE EA). All rights reserved. Metropolitan employment forecasts are copyrighted by Moody s Economy.com. Sources of information utilized in this report include CBRE, CoStar, Moody s Economy.com, and CBRE EA. The information presented has been obtained from sources believed to be reliable but its accuracy, and that of the opinions and forecasts based thereon, is not guaranteed. All opinions, assumptions and estimates constitute CBRE EA s judgment as of the date of the release and are subject to change without notice. The information and material contained within this product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or real estate assets. This product does not take into account the investment objectives or financial situation of any particular person or institution. CBRE EA holds all right, title and interest in this product and the proprietary information contained therein. This product is licensed to the Licensee for use in the ordinary course of the Licensee s ordinary business, subject to the restrictions set forth herein. Unless otherwise agreed to in writing by CBRE EA, Licensee shall not provide this product to, or permit their use by or for, any third party, including, without limitation, any parent, subsidiary, affiliated entity or franchisee of Licensee. Licensee agrees to hold this product and all proprietary information contained therein in strict confidence and further agrees not to sell, sublease or disseminate this product including, but not limited to, computer readable data files, either in whole or in part, without the prior written consent of CBRE EA. Licensee agrees to acknowledge CBRE EA in any reports, presentations or any other materials produced by Licensee using this product as the source of the data in which such report, representation or other material is based. CBRE EA hereby represents that it will use commercially reasonable efforts to deliver the scope of services free from any defects in design, materials and workmanship, and free of viruses as such terms are understood in the computer industry.